Business Attorneys Advise on Differences Between an S Corp and a C Corp
When you are considering forming a corporation, you should consult with business attorneys to find out both if the corporate form is right for you and to determine what type of corporation would be the best structure for your business.
Incorporating your business can provide important protections and can also make it easier to sell shares of your business or to transfer ownership of the company. While there are some paperwork requirements and a few downsides to incorporating (like the need to pay fees for incorporation), the advantages of the corporate form often significantly outweigh any cons of incorporating. If you’ve made the choice to incorporate, you’ll need to decide whether your company should become a S-corporation or a C-corporation.
Brown & Charbonneau, LLP has extensive experience with startup companies and with advising growing companies. Whether you are just beginning your business, you are expanding, or you have simply decided that now is the time to protect yourself from liability, our Irvine business attorneys are here to help you. Give us a call today to find out more about how we can assist you with deciding on the right corporate form and how we can help you follow the process necessary to operate as either a S-corp or a C-corp.
Differences Between an S-Corp and a C-Corp
When you form a corporation, the default type of corporation is a C-corporation. However, some business owners decide they would prefer to operate as an S-corp instead. S-corp is named for the section of the IRS code (Subchapter S) that sets the rules for operations. If you plan to operate as an S-corp, you need to take an additional step to let the IRS know that this is your preference and you need to meet the deadline for doing so. Form 2553 is the S-corp election which must be filed with the Internal Revenue Service (IRS).
Forming either an S-corp or a C-corp can make it possible for you to get protection from liability. The company will exist as a separate corporate entity and if the company is sued or if it goes bankrupt, your personal assets shouldn’t be affected as long as you actually maintained a separate identity, followed corporate formalities, and didn’t co-sign for company debt. However, there are substantial differences between S-corps and C-corps.
One of the most important differences between S-corps and C-corps relates to how the company is taxed. For many business owners, this is the most important different.
C-corporations are taxed on profit. When they make distributions to owners, the owners are taxed on the income from the dividends or distributions. This means there is the possibility of double taxation since the company pays taxes and the owners do as well.
Despite the risk of double taxation, tax savings can still be achieved in some cases with C-corps due to income splitting. This involves splitting income between the owners and the company to take advantage of lower corporate tax rates on some income.
S-corps, on the other hand, are taxed differently. Profits and losses can flow through to owners so the income is taxed at the owner’s personal rate. However, if some of the profits are taken as distributions rather than as salary, Social Security and Medicare taxes don’t have to be paid on the distributions. This can result in significant tax savings.
In addition to differences in taxation, there are also more restrictions on ownership of an S-corporation. For example, S-corps are restricted to having no more than 100 shareholders and all of the shareholders of an S-corporation have to be either United States citizens or lawful permanent residents of the United States.
S-corps can also have only one class of stock, while there may be multiple classes of stock owned by shareholders of C-corporations. These ownership restrictions could prevent you from structuring the ownership of companies the way you would prefer. The restrictions also help to explain why most publicly-traded companies are C-corporations.
How Business Attorneys Can Help You Incorporate
Deciding to incorporate is a big step, but it is often a smart step for most businesses. Irvine business attorneys at Brown & Charbonneau, LLP can provide help to companies with the incorporation process.
We can advise you on whether incorporation is right for you and on whether an S-corp or a C-corp makes the most sense in your situation. We can also provide you with help in completing the official process of getting your business incorporated. Give us a call at (866)237-8129 or contact us online to learn more about the assistance we can offer.